Avianca declares bankruptcy, seeks protection in restructuring

An Avianca A320; several are to be returned to lessors under the company’s bankruptcy reorganization

Colombia’s Avianca became the latest and largest carrier to seek financial protections as the coronavirus pandemic stretches on, grounding airlines and flummoxing their balance sheets. Parent company Avianca Holdings filed for Chapter 11 protection under US bankruptcy law on Sunday, seeking shelter from creditors while it works to reorganize its operations. The company’s loyalty program LifeMiles operates as a separate company and is not included in the filing.

Avianca is facing the most challenging crisis in our 100-year history as we navigate the effects of the COVID-19 pandemic. Despite the positive results yielded by our ‘Avianca 2021’ plan, we believe that, in the face of a complete grounding of our passenger fleet and a recovery that will be gradual, entering into this process is a necessary step to address our financial challenges. – Anko van der Werff, Chief Executive Officer of Avianca

Like other airlines around the globe Avianca faces significant pressures as it has grounded its entire fleet. It faces significant debt payments coming due and with no revenue to generate cashflow is now seeking court protections to renegotiate some of these deals. While the company’s press release indicates it “intends to pay vendors and suppliers, as well as travel agency partners in the ordinary course for goods and services provided on or after the filing date during its Chapter 11 process” debts incurred prior to the filing are less likely to be recovered. The company is requesting permission to pay pay “certain prepetition employee wages, compensation and benefit obligations owed from before the filing date, as well as a request to continue paying wages and honoring employee benefit programs in normal day-to-day operations” as well as some of its debts to travel agencies, vendors and suppliers.

Notable among the changes for the company is a move to cancel 14 aircraft leases, drawing down the fleet as the carrier right-sizes for what it believes it will need coming out of the crisis. While lessors are negotiating with other airlines directly this is a more blunt approach to cancel those contracts.

The bankruptcy filing also highlights the less traditional ownership structure of the airline. The company was rescued from a prior bankruptcy in 2003 by German Efromovich. But he also saddled the company with debt, using the equity to fund other projects. Ultimately he was ousted from control through a boardroom maneuver led by United Airlines. That company invested significantly in Avianca and was working towards a joint venture also including Panama’s Copa Airlines. The future of all these deals remains unclear, though United has accounted for a billion dollar loss on its investment in the latest quarterly filing.

Travel remains unaffected

The company is clear that travel will continue unaffected, though what that means today is slightly more challenged. All tickets and vouchers remain valid and customers can continue to participate in the LifeMiles loyalty program, including global reciprocity through Star Alliance. But the carrier is also still not operating flights owing to government requirements and when those return remains unclear.

The company also announced that it will wind down its local operations in Peru. The move is to “allow Avianca to renew its focus on core markets” and is an exception to the idea that everything is unaffected.

Loyalty still thriving

LifeMiles remains unscathed for now as well. The LifeMiles program operates as a separate company which offers some advantages in this scenario. Among them, the program can continue to operate even without the airline. But that also comes with risks. The program’s value is strongly tied to its relationship with the airline and passengers’ ability to redeem points for travel. Losing that would be a death knell to most programs, including for LifeMiles.

Of course, the Jet Privilege program managed a pivot to InterMiles following the bankruptcy and suspension of operation of its associated airline. But that is generally the exception, not the norm. In the case of LifeMiles a significant portion of the program’s cashflow comes from directly selling points to program members. That would vanish quickly should the airline redemption opportunity dry up.

About Seth Miller

Seth Miller has over a decade of experience covering the airline industry. With a strong focus on passenger experience, Seth also has deep knowledge of inflight connectivity and loyalty programs. He is widely respected as an unbiased commentator on the aviation industry.

He is frequently consulted on innovations in passenger experience by airlines and technology providers.

It is a bizarre situation where the holding company is US-registered and trades on the NYSE but the airline is registered in Colombia. I think it is the only example of that arrangement in the Americas, if not the world.